Rogers Sugar Inc.: Fourth Quarter 2013 Results

MONTRÉAL, QUÉBEC--(Marketwired - Nov. 14, 2013) - Rogers Sugar Inc. (TSX:RSI)

Message to Shareholders: On behalf of the Board of Directors, I am pleased to present the highlights of the financial results of Rogers Sugar Inc. (the "Company") for the three months and year ended September 28, 2013.

Results for the fourth quarter and fiscal years 2013 and 2012 are as follows:

For the three months ended							For the year ended
			September 28 2013 (unaudited)		September 29 2012 (unaudited)		September 28 2013 (unaudited)		September 29 2012 (unaudited)
(In metric tonnes) Volume			176,641		164,539		649,274		641,573
(In thousands of dollars)
Gross margin		$	17,545	$	18,077	$	85,653	$	77,861
Expenses:
	Administration and selling		3,379		4,625		18,005		18,923
	Distribution		2,166		2,380		8,110		8,334
Results from operating activities ("EBIT")			12,000		11,072		59,538		50,604
Net finance costs			2,627		2,451		9,127		9,695
Income tax expense			2,670		1,677		13,146		10,648
Net earnings		$	6,703	$	6,944	$	37,265	$	30,261

Fourth quarter volume increased by approximately 12,100 metric tonnes as compared to the same quarter of fiscal 2012. Both industrial and liquid volumes were higher in the fourth quarter by approximately 10,700 and 6,000 metric tonnes, respectively. Industrial volume was higher due to volume gains from new and existing customers. Liquid volume was higher due to the recovery of a high fructose corn syrup ("HFCS") substitutable account in western Canada. This was partially offset with lower export sales of approximately 3,900 metric tonnes and lower consumer volume of approximately 700 metric tonnes during the quarter. The decrease in export sales is due to the timing of delivery of volume against the annual U.S. quota and exports to Mexico. The decrease in consumer volume was due mainly to timing in customer promotions.

For the year, total sales volume of 649,274 metric tonnes represented an increase of 1.2% over the previous year. The total volume increased by approximately 7,700 metric tonnes. Industrial volume increased by approximately 30,600 metric tonnes as the Company gained additional volume with existing and new customers. In addition, liquid volume increased by approximately 14,500 metric tonnes as the Company recovered a large HFCS substitutable account in western Canada. These increases were partially offset by a reduction of 35,400 metric tonnes of export volume and 2,000 metric tonnes of consumer volume, the latter due to timing in retail promotions.

In fiscal 2012, a special refined sugar quota of 136,078 metric tonnes opened, effective October 3, 2011 by the U.S. Department of Agriculture, of which 25,000 metric tonnes was allocated directly to Canada and the balance of 111,078 metric tonnes to global suppliers on a first-come, first-served basis. The Company, through its cane refineries, was able to enter approximately 10,000 metric tonnes against the global quota by the time it closed on October 25, 2011. An additional volume of approximately 17,600 metric tonnes of beet sugar was entered against the Canada specific quota by the date the quota closed on November 30, 2011. There was no special refined sugar quota in fiscal 2013. In addition, both the U.S. and Mexican markets had surpluses of inventories, creating downward pressure on selling prices in their respective markets. As a result, export opportunities decreased and therefore reduced the overall export volume by 35,400 metric tonnes.

With the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of each reporting period, the Company's operating results could have large fluctuations. This accounting income does not represent a complete understanding of factors and trends affecting the business. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Company during the reporting period, which are non-GAAP measures. This adjusted performance is comparable to the adjusted earnings reported in previous interim reports. In this press release we will discuss adjusted gross margins which reflect the operating income without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.

Gain / (Loss)	For the three months ended							For the year ended
(In thousands of dollars)		September 28 2013 (unaudited	)		September 29 2012 (unaudited	)		September 28 2013 (unaudited	)		September 29 2012 (unaudited	)
Mark-to-market adjustment	$	(1,756	)	$	(3,776	)	$	(7,972	)	$	(14,243	)
Cumulative timing differences		1,544			157			10,646			(10,088	)
Total adjustment to cost of sales	$	(212	)	$	(3,619	)	$	2,674		$	(24,331	)

Gains or losses on these instruments are only recognized by the Company when sugar contracts are delivered to the end user or when natural gas has been used in the operations.

During the quarter, a mark-to-market gain of $0.7 million was recorded on sugar futures contracts, versus a loss of $1.9 million for the comparable quarter of fiscal 2012, as world raw sugar values increased slightly from June 2013 levels. Year-to-date, a mark-to-market loss of $7.2 million was recorded as compared to a loss of $5.7 million for fiscal 2012. For natural gas, a negligible mark-to-market gain was recorded for the quarter as the slight decrease in U.S. denominated natural gas prices was more than offset by an increase in the Canadian/U.S. dollar exchange rate. For the fourth quarter of 2012, a mark-to-market gain of $1.0 million was recorded. Year-to-date, a mark-to-market loss of $1.2 million was recorded in 2013 compared to a loss of $3.6 million in the prior year. Although natural gas prices continue to decline slightly in 2013, the mark-to-market loss decreased compared to the previous year as contracts at higher prices expired in 2013. Foreign exchange forward contracts and embedded derivatives on which foreign exchange movements have an impact had a combined mark-to-market loss of $2.5 million for the quarter and a gain of $0.4 million for the year as a result of the movement of the Canadian dollar versus the U.S. dollar. In fiscal 2012, the Company recorded a loss of $2.9 million and $5.0 million for the quarter and for the year, respectively.

The cumulative timing differences are as a result of mark-to-market gains or losses which are recognized by the Company only when sugar is sold to a customer and when natural gas is used. The gains or losses on the sugar and related foreign exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions being the sale and purchase contracts with customers and suppliers. The year-end adjustment is the total of all quarterly results. This adjustment is added to the mark-to-market results to arrive at the total adjustment to cost of sales. For fiscal 2013, the total cost of sales adjustment is a gain of $2.7 million to be deducted from the consolidated operating results while a total cost of sales loss of $24.3 million was added to the consolidated operating results in fiscal 2012 to arrive at the adjusted operating results of these two years.

The Company also recorded a mark-to-market loss of $0.1 million for the quarter as compared to a gain of $0.2 million in fiscal 2012 for an interest swap. For the year, a gain of $1.8 million was recorded as opposed to a gain of $2.1 million for fiscal 2012 as recorded mark-to-market losses from the previous years are reversed from the passage of time of the 2008 interest rate swap.

The total adjustment to net earnings before income taxes for the quarter was a loss of $0.3 million compared to a loss of $3.4 million in fiscal 2012. For fiscal 2013, the total adjustment was a gain of $4.5 million compared to a loss of $22.2 million in fiscal 2012.

Adjusted financial information is as follows:

For the three months ended								For the year ended
(In thousands of dollars)		September 28 2013 (unaudited	)		September 29 2012 (unaudited	)		September 28 2013 (unaudited	)		September 29 2012 (unaudited	)
Gross margin as per above	$	17,545		$	18,077		$	85,653		$	77,861
Adjustment as per above		212			3,619			(2,674	)		24,331
Adjusted gross margin		17,757			21,696			82,979			102,192
EBIT as per above		12,000			11,072			59,538			50,604
Adjustment as per above		212			3,619			(2,674	)		24,331
Adjusted EBIT		12,212			14,691			56,864			74,935
Net earnings as per above		6,703			6,944			37,265			30,261
Adjustment to cost of sales as per above		212			3,619			(2,674	)		24,331
Adjustment for mark-to-market interest rate swap		80			(211	)		(1,787	)		(2,119	)
Deferred taxes on above		16			(570	)		1,018			(5,448	)
Adjusted net earnings	$	7,011		$	9,782		$	33,822		$	47,025

For the quarter, the adjusted gross margin rate was $100.53 per metric tonne as compared to $131.86 per metric tonne in fiscal 2012. The decrease of $31.33 per metric tonne was due to higher costs of raw material in Taber, higher maintenance costs in Vancouver due to an unusual breakdown and poorer overall plant performances. In addition, the sales mix with higher industrial and liquid volumes and lower consumer and export volumes also had a negative impact on the adjusted gross margin rate for the quarter.

The adjusted gross margin rate decreased in fiscal 2013 by $31.48 per metric tonne due mainly to an unfavourable sales mix with higher lower margin liquid and industrial volume and no special export quota to the U.S. In addition, the Company incurred additional operating costs in fiscal 2013 by recording a $1.9 million charge for committed future pension benefit updates, $1.0 million of additional energy costs for auxiliary natural gas, $0.6 million in additional unplanned maintenance costs at the Vancouver refinery and some packaging inefficiencies.

Distribution expenses for the quarter and the year were approximately $0.2 million lower than the comparable quarter and year-to-date of fiscal 2012 due mainly to timing in shipments to the U.S. under the Canada-specific quota.

For the quarter, administration and selling costs were lower by approximately $1.2 million compared to the same quarter in fiscal 2012 due mainly to lower legal, doubtful accounts and incentive provision expenses. Year-to-date, administration and selling costs were lower by approximately $0.9 million versus fiscal 2012 due to a decrease in employee benefits and a lower incentive provision expense.

Net finance costs for the quarter were $0.2 million higher than the comparable quarter of fiscal 2012 due to a swing of $0.3 million in the mark-to-market of the interest rate swap which had an income of $0.2 million in fiscal 2012 versus a loss of $0.1 million in fiscal 2013. This was offset by a decrease of $0.1 million due to lower interest costs on the revolving credit facility with the new five-year interest rate swap of 2.09%. Year-to-date, net finance costs were lower by $0.6 million. In fiscal 2012, the Company recorded a $0.6 million loss on early redemption of the third series debentures. In addition, interest on convertible debentures decreased by approximately $0.2 million, offset by a smaller mark-to-market gain of approximately $1.8 million versus $2.1 million in fiscal 2012 for the interest swap, which increased net financing costs by $0.3 million.

In order to provide additional information the Company measures free cash flow that is generated from operations. Free cash flow is defined as cash flow from operations excluding changes in non-cash working capital, mark-to-market and derivative timing adjustments, financial instruments non-cash amount, funds received or paid from the issue or purchase of shares and investment capital expenditures. Free cash flow is not intended to be representative of cash flows or results of operations determined in accordance with IFRS. It may also not be comparable to similar measures used by other companies.

Free cash flow is as follows for the quarter and year-to-date:

(In thousands of dollars)		For the three months ended							For the year ended
			September 28 2013 (unaudited	)		September 29 2012 (unaudited	)		September 28 2013 (unaudited	)		September 29 2012 (unaudited	)
Operating activities:
Cash flow from operating activities		$	30,635		$	22,747		$	37,653		$	47,793
Adjustments:
	Changes in non-cash working capital		(20,187	)		(11,596	)		3,452			(14,417	)
	Changes in non-cash income taxes payable		(499	)		(389	)		1,423			5,113
	Changes in non-cash interest payable		(1,668	)		(1,566	)		368			315
	Mark-to-market and derivative timing adjustments		292			3,408			(4,461	)		22,212
	Financial instruments non-cash amount		(877	)		170			6,458			1,699
	Capital expenditures		(4,201	)		(4,699	)		(9,117	)		(9,183	)
	Investment capital expenditures		850			372			1,430			694
	Issue (buy back) of securities		-			90			92			352
	Deferred financing charges		(119	)		-			(569	)		(2,716	)
Free cash flow		$	4,226		$	8,537		$	36,729		$	51,862
Declared dividends		$	8,470		$	8,469		$	67,751		$	32,915

Free cash flow for the quarter was $4.3 million lower than the comparable quarter of fiscal 2012 due to higher cash pension contributions and higher income taxes paid versus last year of $2.0 million and $0.7 million, respectively, and lower adjusted results from operating activities of $2.5 million. This was slightly offset by a reduction in capital expenditures, net of investment capital of $1.0 million, due to timing of projects for maintenance of operations versus investment capital. Year-to-date free cash flow was $15.1 million lower than the previous year. The decrease is due mainly to lower adjusted results from operating activities of $18.1 million. This was partially offset with an increase in free cash flow of $2.1 million as deferred financing charges of $0.6 million were paid in fiscal 2013 for the renewal of the revolving credit facility compared to $2.7 million in fiscal 2012 for the issuance of the fifth series debentures. In addition, $0.7 million of additional investment capital expenditures were made this year versus last.

During the second quarter of fiscal 2013, the Company declared and paid an additional dividend of $33.9 million based on previously earned but undistributed free cash flow of approximately $64.7 million generated in the last five fiscal years ended September 29, 2012.

OUTLOOK

The total sweetener market increased slightly in fiscal 2013 and we forecast the market to continue to increase by a small percentage every year, in-line with population growth.

We anticipate that consumer volume will be slightly higher in 2014 than it was in 2013, largely as a result of a new multi-year national agreement with a major consumer account taking effect in January 2014. However, the consolidation of certain large retail accounts has intensified the competitiveness in this already highly competitive market.

The Company also expects export volume to be lower in 2014 as compared to 2013, offsetting the anticipated increase in consumer volume. Large crops in Mexico and the U.S. in fiscal 2013 resulted in significant surplus inventories and will therefore limit export opportunities in these countries in fiscal 2014. The Company will continue to investigate other export opportunities similar to those developed several years ago in Mexico, in order to secure additional export sales.

Overall, total sales volume and adjusted gross margin rates are expected to be slightly lower in fiscal 2014 as compared to fiscal 2013 due to further reductions in export volume and an increasingly competitive environment in the consumer and industrial segments.

The Canada-European Union ("EU") Comprehensive Economic and Trade Agreement ("CETA") is a positive development for the Canadian sugar market. Under the agreement, Canada will not have direct access to the EU market but will be able to secure additional exports of sugar-containing products ("SCP"). The initial SCP volume is set at 30,000 metric tonnes growing in 5 year increments to 51,840 metric tonnes over 15 years. Although the CETA agreement is positive news for the Canadian sugar industry, the new trade agreement is not expected to have any impact in fiscal 2014 as it may take up to two years for the CETA to be ratified by all parties.

The harvest and beet slicing campaign in Taber started on October 1, 2013. Early indications are favourable as the yield per acre harvested and the extraction rate achieved to date are better than forecast. Taber's beet crop, currently being harvested, is approximately 24,000 acres and if current harvesting conditions continue, we expect to produce approximately 85,000 tonnes of beet sugar in fiscal 2014.

Approximately 50% of fiscal 2014's natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2013. Any un-hedged volume should benefit from the current low prices of nearby natural gas and therefore increase the adjusted gross margin rate. In addition, limited futures positions for fiscal 2015 to 2017 have also been taken. Some of these positions are at prices higher than current market value, but are at the same or better levels than those achieved in fiscal 2013. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.

As discussed previously, the Company entered into a new five-year credit agreement of $150.0 million and a five-year interest rate swap agreement at 2.09%. The reduction in the credit facility combined with the attractive interest rate swap should generate some financing costs savings.

With the increase in the discount rate at the end of fiscal 2013, pension plan expenses are expected to be slightly lower next year. However, pension cash contributions were increased following this year's actuarial valuations and may increase in the future as and when new actuarial valuations are done. In fiscal 2014, total pension cash contributions are expected to increase by approximately $4.5 million as the Company will make a one-time cash contribution for future plan benefit updates committed in fiscal 2013 and may fund the potential withdrawal of a SERP by a senior executive following his retirement. In the current financial environment, return on pension plan assets may vary from historical plan performance. This, combined with the discount rate used in assessing the plan liabilities, may impact pension plan expenses in future years.

FOR THE BOARD OF DIRECTORS,

(SIGNED)

A. Stuart Belkin

Vancouver, British Columbia

November 14, 2013